Red Tape Today Means Caution-Take Some Off
XBI at $167.83 Off 2%
Traders, investors, executives even pension funds are thrilled with biotech investing as the stock group rolls on to new highs this month. What may not be appreciated is the 20% move off the October 16 bottom when gloom and doom reached its nadir due to macro events such as Ebola, Ukraine and the global economy. And keep in mind volatility will be back just as it did in March and October. But biotech has gone mainstream and the least scientifically trained investor can trade these stocks with a lot of help from the internet and technical anlysis. I will summarize some key posts made this year with regard to trading and investing strategies but be sure to review the long term picks in our portfolio.Keep in mind that biotech speculation and momentum is pervasive right now and the volatility of small cap stocks is very high. Our basic portfolio of Rayno Life Science stocks were picked with a proprietary model including fundamentals and technicals.
With the sector at an all time high way beyond the Q1 2014 bubble tops be cautious before adding new positions.
- Basic Investing Approach: Buy an ETF and a Life Science Fund
Our top recommendation is the ETF First Trust NYSE Arca Biotech ETF (FBT) currently up 41% YTD. But the IBB and XBI are also up about 30% YTD so outperformance can be achieved with almost any liquid ETF. The Fidelity Select Biotech Fund (FBIOX) is also up about 29% YTD so it is a good complement to an ETF if you prefer an actively managed fund. We have done numerous comparisons of these ETFs over the years and at times the leaders change. Another conservative approach is to life science investing is to buy a healthcare ETF such as XLV, the NYSE Arca SPDR which is up 21% YTD and 126% over five years. The Affordable Care Act (ACA) as well as Medicare have been factors in both healthcare and biotech sector strength because of more patients.
- Core Positions Should Be Large Cap Biopharmaceuticals
We have developed the Rayno Large Cap portfolio over the years which provide returns comparable to most funds but one should buy all six of these stocks plus FBT to minimize risk. Moreover 3 large cap biotech stocks are among the top performers YTD: Amgen, Inc. (AMGN), Gilead Sciences (GILD) and Regeneron Pharmaceuticals (REGN). Our other three large caps picks are: Alexion Pharmaceuticals (ALXN), Biogen Idec (BIIB) and Roche ADR (RHHBY). We will be rebalancing this group from time to time and today there is considerable weakness in BIIB and GILD; the FBT is down 2.39%.
- Use Mid Caps To Balance An Aggressive Portfolio
Now the stock picking becomes more difficult because we need more knowledge of the technology, product pipeline and clinical expectations. We have picked five mid-caps over the past 12 months as “motifs” if you will, that are emerging as growth stocks. They are Alkermes Plc (ALKS), Cubist Pharmaceuticals (CBST), Pharmacyclics (PCYC), Seattle Genetics ,Inc. (SGEN) and Vertex Pharmaceuticals (VRTX), Vertex is the leader up 51% YTD while Seattle Genetics (SGEN) is the laggard down 7.5% YTD. These companies have revenue, products and pipelines.
There is a lot of money chasing biotech stocks with a momentum strategy. IPOs and investment banking activity are near its peak. As you can see from the above metrics you can be a profitable player by investing in one ETF. Nonetheless speculation is widespread and many mid and small cap stocks are up 50 to 100% YTD. What becomes difficult with traders in a “bubbly” market like this is holding on to multiple positions with the stocks soaring, as well as controlling losses. If you are not trading every day (not to be confused with “day trading”) watching your positions, you can lose 10-20% easily in one stock in one week. And always have at least 10% cash on hand for new trades. Keep in mind we do not offer “sell recommendations” rather we delete stocks from our portfolios.Today mid-caps are in a vicious sell-off with PCYC and SGEN down over 3% on low volume.
- Small Cap Investing-Are You aTrader or an Investor
Where to go from here? In August we have started developing a small cap speculative portfolio for trading but with a criteria that offers big potential over the longer term. First look at small caps in our portfolio that have done well over the years: Achillion (ACHN), Albany Molecular (AMRI), and Cardiovascular Systems, Inc. (CSII) as well as four companies that were acquired with nice profits. Be sure to follow the IWM Russell 2000 ETF, a good indicator of biotech small cap strength.
Here are several small cap stocks that we picked for trading or momentum investing: Celldex Therapeutics (CLDX), Fibrocell Science (FCSC), GlycoMimetics(GLYC), Karyopharm Therapeutics (KPTI) and Pacific Biosciences (PACB). All of these stocks were good trades. We will post an update by early December. Today add Foundation Medicine Inc. (FMI) now at $25 to this list.
Summary
- Core position for long term investors is FBT and Rayno Large Cap Biopharma. The secular bull market in biotech is intact.
- Entry level for new buys is hard to call because the sector is up 40% YTD.
- Traders must be daily participants and do their research. “Chasing the tape” is a difficult job.
- Seasonality is favorable in Q4 early January time frame but market is a bit frothy right now.
- Always follow the technicals.